Green leases, defined: how can they improve sustainability in real estate?

Posted on: 29 January, 2024

Implementing green leasing could help address the role of operational carbon emissions in the ongoing climate crisis. Read on to find out how.

While gas, oil, automotive and aviation are typically the sectors that come to mind when people think of greenhouse gas emissions, the built environment is a hugely significant contributor to the climate crisis that often goes under the radar.

Our sector is responsible for around 40% of CO2 emissions, 33% of water consumption, and 35% of waste, according to the World Green Building Council (WGBC). However, while efforts to address the damage tend to focus on the construction industry and sustainable innovations like lean construction and mixed use developments, the real estate industry also has a central part to play in combatting climate change.

With the global flooring area expected to double by 2060 and demand for infrastructure soaring, real estate professionals and businesses can ensure we realise a sustainable built environment by implementing green leases.

What is green leasing?

A green lease is a form of lease or supplementary document that includes clauses relating to a building’s environmental performance. It’s essentially an agreement between a tenant and a landlord whereby both parties share the responsibility of managing and improving the environmental performance of the property.

Green leases are also referred to as energy-efficient leases, high performance leases and aligned leases. They’re often agreed in order to help maintain green building certifications like BREEAM and LEED, which is why they tend to be more common among commercial properties than residential ones.

Learn more: It’s not easy, being green – are green building certifications just greenwash?

What does a green lease consist of?

Although they can be legally binding, green leases are neither standardised nor legally required in the UK. This means they’re extremely flexible, and the agreed measures can range from minor efficiency activities (like switching off lights when not in use, recycling or going paperless) all the way to more extensive work, like implementing heating and cooling systems.

A green lease requires, at minimum, a commitment between the owner and the occupant of a building to improve its sustainability. Data on sustainability also needs to be shared between both parties to ensure improvement.

The different types of green leases

The type of green lease agreed between a landlord and a tenant will depend on the commercial requirements and budget of both parties, along with the type of property and its existing environmental credentials. The number of requirements agreed in the green lease will also determine which of the following categories it falls under:

• Light green leases: These consist of lighter clauses that aren’t legally binding. They may take the form of a Memorandum of Understanding (MoU) rather than a lease.
• Medium green leases: These carry more weight and set out obligations for both parties without the risk of any unreasonable financial burdens. They may involve measurements and data, such as setting energy efficiency targets.
• Dark green leases: The most detailed category of green lease is legally binding and involves a significant commitment from both parties. They also require the most expense, with the trade-off being that these measures will have the greatest environmental impact.

Why is green leasing important for real estate?

While new sustainable concrete alternatives and techniques like prefabrication are helping to make new buildings and projects sustainable, the obstacle of existing housing stock remains. The UK in particular has challenges here, as our country has the oldest housing stock in Europe.

The unfortunate reality is that even if we continue to innovate and create new net zero buildings, our old, inefficient housing stock that hasn’t been optimised for modern sustainability standards will continue to hold us back. Along with driving sustainability in new builds, green leasing will help encourage eco-friendly measures for existing buildings and provide alternatives to traditional demolition and redevelopment, like retrofitting and adaptive reuse.

Similarly, while construction innovations have helped address embodied carbon, operational carbon (emissions resulting from when a building is in use), account for 28% of greenhouse gas emissions. What’s more, the majority of emissions from the average commercial building come from tenant-occupied areas.

Green leasing helps to combat this by laying out commitments for both the landlord/property owner and the tenants. With many leases taking into account energy performance and data in their agreements, they can ensure operational emissions are kept to a minimum and any alterations that could impact efficiency are prohibited.

6 benefits of green leasing for landlords and tenants

Along with addressing the challenge of ageing housing stock and reducing operational carbon emissions, green leasing can offer a wide range of benefits for both landlords and tenants, including:

1. Reduces utility costs

Both landlords and tenants stand to benefit from improved efficiency, reduced utility bills and a decrease in resource consumption thanks to the sustainability initiatives and measures imposed by the green lease.

2. Increases the attractiveness of a property

Just as businesses, investors and stakeholders now often seek out properties with green building certifications, many also look for green leases to address any concerns around sustainability.

3. Supports and improves brand reputation

A green lease will be more attractive to a business that wants to improve its reputation as a sustainable organisation and support their environmental commitments and ESG targets.

Learn more: Making a business case for sustainability: why now is the time to act

4. Improves market reputation for landlords

In the same way  a green lease will boost the reputation of an occupant, it also helps landlords and building owners in the market as demand for sustainable buildings continues to grow.

5. Enhanced health and wellbeing for occupants

Tenants and occupants of buildings with green leases can benefit from the impact its improved environmental features have on their health and wellbeing, particularly in the case of dark green leases with efficient heating and cooling systems.

6. Improve ability to attract and retain talent

With young generations placing great emphasis on an employer’s sustainability credentials, being able to point to a green lease and the sustainability activities listed in the commitment are another selling point organisations can use to recruit and retain talent.

Learn more: Diagnosing the green skills gap: what skills is the built environment missing?

The potential drawbacks of green leasing

Green leasing isn’t without its potential downsides, which many believe are hindering its growth and popularity.

The central fear around green leasing is the impact it will have on costs for both landlords and tenants. Landlords in particular are likely to incur the brunt of any expenses for dark green leases, but while they can charge a premium for these properties, they’ll only be able to realise these benefits if demand is high enough and a tenant is willing to pay.

In the same regard, a tenant that isn’t looking at the property for the long-term is unlikely to realise the full benefits of a green lease that would outweigh the initial increase in expenditure. In a post-COVID-19 market where the need for agility and adaptability is high, short-term contracts and investments are often favoured.

Final thoughts

Green leases look set to be an invaluable measure for real estate moving forward to help address the built environment’s impact on the environment. While there are concerns about how occupants and landlords will realise the long-term benefits of their investments, the flexibility of these leases mean that both parties can work together to find the exact agreement that suits their particular needs.